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What are risks of having two mortgages in one small city, one main residence other a rental?

We are moving back to a community where we already own a home with a great renter in it  What are some good parameters, if buying a second home should we have different types of homes/values or different types of homes to diversity etc., other helpful advice is welcomed?
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October 25 2011 - Ammon
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Answers (6)

Kevin, I would suggest you consult with a tax advisor regarding your rental property, write-downs, depreciation, expenses, reserves, etc.

Unfortunately, there is no fool-proof answer to anything in life. At the end of the day, you need to be comfortable with the payment for your primary residence. It sounds like you are looking at this very conservatively, which I commend.

Consider, if you were to rent rather than purchase a home, what would your rent payment be? Even if both of you were to lose your job, you would still have rent to pay, right? Are you both employed in the same industry and face the same layoff risks? If not, perhaps you should size to smaller payments that could be maintained by the earner with the more "event-proof" employment.

You should also consider a purchase that the payment does not exceed local rent payments you would otherwise incur. And you obviously still have the tax advantages of owning over renting, which it sounds like you are on top of. If you are not comfortable still, why not live in the home you are currently renting out?

Obviously you are collecting rents on the investment property (even at a loss) and I don't believe that 10 miles is far enough away from your primary to be considered a second home by the IRS. (I'm sorry, I don't understand about the 10% more cost comment below?)

A tax advisor can help you with a financial plan to reserve for replacing that roof, and a local mortagage lender can guide you as to purchasing a new home for a primary residence, required reserves, how they will calculate debt ratios with regard to your rental, etc.
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October 26 2011
Profile picture for Kevin DeKold
Answers to several questions that might help for you to know;

Existing rental will show small loss on taxes of about $750 this year, but I expect the losses to be greater in the next couple of years since it will need a new roof.

The new home that we are looking at to be primary residence has about costs about 10% more cost.

This is a small city of 50,000.  The rental is on one side of town 10mi away from the home we are looking at on the other side of town.

We could not afford both homes if all income earners in both homes lost all their jobs - I don't think many could...  The rental market by what I can tell appears strong, and we have 4mo reserves for both homes, 8mo for one or the other.
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October 25 2011

A couple of questions:

Do you clain the rental property on your taxes? Is the property showing a profit?

What type of loan do you have on rental property? FHA, VA, conventional or USDA? When you applied for the mortgage did you list it as your primary, 2nd or investment property?

Are you looking at homes in a higher or lower price range?

How close will the properties be (miles apart)?

Did you own another home when you moved away? If so, have you sold that property?

Lenders and their underwriters will look at the aforementioned questions to determine your eligibilty along with income, assets, credit and employment.

Feel free to click on my profile if you have any other questions you would like answered by a lender.

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October 25 2011

I would put a question back to you first before answering yours, mainly, why would you believe there is risk for having two mortgages in one small city?  You mention "diversify" as though this is a stock purchase. Unless you're trying to do some form of dollar cost averaging within real estate, it's probably not a realistic way to consider it.

If you're worried that because it's a small town and there are limited job opportunities, and therefore if one main employer fails then there will be a major drop in home values - then you should probably take into consideration your own employment stability depending on how many income earners are in your household - and your renter's employment stability, etc. Could you afford both properties if one or more jobs were lost? What level of reserves (cash in the bank or other investments) do you have available to make payments if something happens, etc.

These would be a few of the financial planning elements I would put into it. If you can get low interest rate loans (which is all over right now) and very reasonable payment levels for your income situation, then you should be good. Don't overextend. Consider that if you are looking for long term holds on one or both of these properties that a low interest 30-year loan would be in your favor.

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October 25 2011
Kevin, If you are moving back, presumably the home you are looking to purchase is for your own primary residence. Your mortgage lender may consider your rental income when qualifying you for your new mortgage and any mortgage you have on the rental property will likely also be included in your debt ratios.

As far as a home to purchase, consider how long you plan to stay in the home, how much equity you plan to invest in the home in terms of down payment dollars (and %). Given our current market locally, I would recommend finding a home that you can be happy in for 5-10 years and putting 20% down, if possible.

If you are moving to the east Idaho area, please feel free to contact me by email for more information. I can also help locate a realtor for you elsewhere in the country via my national professional network.

Best,
Chris
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October 25 2011
Just buy the best house in the best location in the best condition you can, for as little as possible. Always look to the resale of the property.
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October 25 2011
 
Related Questions
What are risks of having two mortgages in one small city, one main residence other a rental?
Profile picture for Chris Pelkola Lee
Latest answer by Chris Pelkola Lee
October 26 2011 | 6 answers
  • Asked by Kevin DeKold
  • In Rentals
  • October 25 2011
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